The trend of people, on average, living longer, healthier lives has important implications for the U.S. retirement system, including one of the most vital pieces of it: Social Security.
Because of average longevity increases, Social Security funds retirement benefits throughout longer claiming periods—that is, the postretirement period when a person starts drawing their benefits. Since 1940, life expectancy at age 65 has increased by about 6.5 years while the full retirement age, or FRA, when full retirement benefits can be claimed, has increased by only 2 years. Social Security benefits are being paid over a longer period of time, and the lifetime value of a person’s Social Security benefits has increased. By 2090, life expectancy at age 65 is projected to increase by an additional 4 years.
Social Security needs to be financially solvent to provide scheduled benefits for all American workers. There are many reform options to address the program’s financial condition and modify the benefit structure, including those that reduce benefits and those that increase taxes. As the American Academy of Actuaries outlined in its recent issue brief, Raising the Social Security Retirement Age, one option that is being debated is raising the FRA again. Congress did that before in a bipartisan fashion in 1983, and could raise the FRA again as part of a reform package that also includes other changes to how benefits are determined and/or the amount of taxes that workers pay into the system.
Commentators such as Alicia Munnell, in her recent MarketWatch column on raising the retirement age, have expressed important concerns about raising the FRA. As explained in the Academy’s issue brief, policy makers may consider the FRA as part of a reform package, choosing among myriad other options to address concerns of all the affected beneficiary populations.
A major area of concern is that longevity expectations and the ability to work at older ages are not uniform across the general population. Longevity increases vary significantly across the socioeconomic spectrum and changing the FRA could disproportionately impact low-income beneficiaries. Social Security data shows that those who had lower earnings over their lifetime have higher mortality rates—that is, they die sooner—than those with higher incomes. Not all Americans can continue to work into older age, either because of physical limitations, job demands, or lack of job opportunities. Those who need to claim their Social Security benefits to provide income will face a higher reduction/lower benefit if the FRA is increased. It is most often low-wage workers who are in this situation, and they rely most heavily on Social Security as their primary source of retirement income.
If Congress acts to address Social Security’s financial challenges, it could choose to raise the FRA, and it could package it with modifications to address these concerns.
There are a variety of possible approaches to be considered. A few of the many options include adjusting the benefit formula to provide relatively greater benefits to lower-earning workers, adding a minimum benefit, or providing different phase-ins of increases in the FRA depending on income levels. These and other types of changes could help offset some or all the benefit reduction impact on lower-wage workers. Changes to Social Security disability provisions and/or the Supplemental Security Income (SSI) program are other examples of options that could be considered.
Longevity increases—those already experienced and those expected in the future—mean that raising the FRA for Social Security is likely to be considered by Congress as one potential part of the solution to the financial solvency of the program.
Social Security is a critical part of the U.S. retirement system on which the vast majority of American retirees rely for retirement security. Therefore, reform options should be considered sooner rather than later, so that policy makers can address the financial shortfall in a timely manner and give workers and beneficiaries time to adjust to any changes made.
Amy Kemp, MAAA, ASA, EA, is chairperson, Social Security Committee, at the American Academy of Actuaries.